Outsourcing payroll services helps avoid business-killing penalties

“When entrepreneurs start an enterprise they often have no concept of how payroll works,” he says. “That leads them to miss the first few payments that are due to federal and state governments, and initial unemployment, workers’ compensation and local tax withholdings. It’s not until penalties accrue that new business owners start to learn when things are due.”

There was a time when many government agencies would have negotiated or forgiven the first fine, or work with the business owner to reduce the penalty. But over the years that doesn’t seem to be the case.

What’s worse, failure to promptly meet payroll tax requirements can stop a business in its tracks. Many businesses that shutdown or go bankrupt do so because of accrued penalties from unpaid payroll taxes.

Smart Business spoke with McElwain about outsourcing payroll functions as a means of avoiding penalties that often trouble new business owners.

What have you found to be the reasons companies incur common payroll penalties?

Penalties typically happen because of a lack of awareness, which is no slight to business owners because keeping up with these payments is challenging. Not only are there many regulations to understand, but regulations can change frequently. Payment schedules can change from once per quarter to once per pay period and often without notice.

Managing payroll is not the specialty of most business owners. Someone who starts a flower shop or a restaurant is probably great at arranging flowers or cooking, but not experienced in managing payroll. Their companies are often big enough to need payroll but not large enough to support a full-time CFO. That’s where outsourcing can provide much needed help.

How can outsourcing payroll services help companies stay in compliance and avoid payroll penalties?

An outsource payroll services company will manage the entire payroll process. It will draft the client’s account and ensure money is being sent to every tax agency at every level on the client’s behalf. And if the provider makes mistake, the provider pays the penalty. Payroll service companies are essentially in the business of compliance, allowing the business owner to focus on day-to-day operations.

Why might a company be hesitant to hire an outsource payroll service partner?

Business owners that forgo an outsource payroll solution often do so because they think it’s expensive. It’s falsely assumed that the cost for the service is based on a percentage of the money going out through payroll. Instead, it’s a flat fee that is typically equal to or less than the business’s cellphone bill.

Sometimes a business owner thinks his or her company is too small for a payroll service. But thousands of owner/operator companies, as well as many businesses with fewer than 10 employees, use a payroll service.

Another myth is that the business owner will lose control over his or her company’s payroll functions. Business owners maintain full control over their payroll when working with an outsource partner. They can write payroll checks as they’d like. They just need to notify their provider so the check can be accounted for.

What’s involved in setting up a payroll service?

A common misconception is that setting up a payroll service is a complicated undertaking. The truth is setup often takes 30 minutes or less. All that’s needed are year-to-date and quarterly payroll reports, copies of tax returns that have been filed, a list of employees, a voided check from the payroll account and the business’s tax IDs. The service provider does all the data entry and setup.

Payroll is one of the easiest duties a business can outsource. There are few if any upfront fees and no length of service contracts. Businesses that have used the service for a month often say they wish they would have done it years ago. It takes a load off a business owner’s mind to know that payroll is being handled, which eliminates the threat of potentially business-destroying penalties.

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